As previously reported, the Alabama Department of Revenue proposed a regulation imposing a rental tax on digital transmissions, broadly defined as “on demand movies, television programs, streaming video, streaming audio, and other similar programs that are made available to customers, regardless of the method of transmission. . . .” The proposed regulation states that “cable or satellite television providers, on-line movie and digital music providers, app stores, and other similar providers of transmissions as described [above] are engaged in the business of leasing tangible personal property and shall be subject to the rental tax.” See Proposed ADOR Rule 810-6-5-.09.

In terms of sourcing, the proposed regulation confirms that the digital transmissions must be “used in Alabama.” And for this purpose, “a digital transmission is considered used in Alabama if the customer’s service address is within Alabama.”

At the Alabama Administrative Procedure Act (AAPA) hearing held at the Department of Revenue’s headquarters on April 8, a number of trade associations, coalitions, and communications-related businesses appeared to protest the proposed regulation, and a number of those parties filed written comments. One of the most comprehensive comment letters was filed by the Digital Goods and Services Coalition, represented by Steve Kranz of McDermott Will & Emery in Washington, D.C., and the authors as local counsel.

More importantly, a letter delivered to Commissioner of Revenue Julie Magee on the day of the hearing, co-signed by the Speaker of the House of Representatives, the President Pro Tem of the Alabama Senate, the President Pro Tem of the House, and the then Chair of the Legislative Council, urged the Commissioner to withdraw the proposed regulation and to allow the Legislature to study the issue as one being particularly within its ambit and not within the jurisdiction of an administrative agency.

Despite the testimony, numerous comment letters, and a request by the legislative leadership, the Department of Revenue issued notice of its intent to proceed with finalizing the proposed regulation, but with some modest amendments, including a delayed effective date of October 1.

In response to that notice, Business Council of Alabama President and CEO William J. Canary issued a stern letter to the House and Senate leadership, urging them to convene the Legislative Council to reject the proposed regulation. “On behalf of the Business Council of Alabama (BCA), I am writing to request that you, as leaders of the Alabama Legislature, call a meeting of the Joint Committee on Administrative Regulation Review [the official name of the Legislative Council] to formally reject the above-referenced rule before it can take effect . . . .” Canary reminded them of the previous letter they had delivered to the Commissioner of Revenue on the day of the AAPA hearing.

“What the Department’s regulation seeks to do … is impose new state and local taxes on streaming content. In so doing, the Department clearly is intruding directly upon the power and authority of the State Legislature in a manner that is contrary to both the Alabama Constitution and the Code of Alabama.” The letter to Speaker Hubbard and Senate President Pro Tem Marsh was released on July 1 on the BCA’s blog.

According to the ADOR, the tax would generate approximately $6 million in additional state revenue per year, not including local rental tax revenues. Many municipalities, but only a handful of counties, impose a parallel rental tax. The proposed regulation does not attempt to deal with the ongoing battles between Alabama’s localities over which taxing authority is entitled to receive the sales or rental tax on various transactions such as this.

ADOR spokesman Frank Miles stated earlier that the rule change simply reflects the current state of technology: “When Movie Gallery was around, there was a rental fee attached to that. All the Department is saying is that the movie you rent on Netflix is also subject to that [tax].”

The authors understand that the Department was urged again to withdraw the proposed regulation, but so far has refused. A Legislative Council hearing has been called by its newly-elected Chairman, Huntsville Senator Paul Sanford, for Wednesday, July 15, at 2 p.m. at the State House in Montgomery.